RBI Tightens Related Party Lending Rules, Introduces Unified Framework

Source: ET

Context:

The Reserve Bank of India (RBI) has issued a draft circular expanding the definition and scope of related party transactions for commercial banks and NBFCs. This reform aims to strengthen corporate governance, prevent conflicts of interest, and ensure greater transparency in lending practices. The new norms will come into effect from April 1, 2026.

Key Highlights:

Broader Definition of Related Parties

The updated framework brings under its ambit:

• Promoters and Key Managerial Personnel (KMPs)
• Shareholders holding over 5% equity
• Entities with significant influence and their relatives
• Earlier, the restrictions were limited only to directors and entities in which they held interests.

Unified Governance Framework

• The new circular consolidates over a dozen legacy circulars, ensuring a single, harmonised rulebook for related party lending.
• The goal is to minimise regulatory arbitrage and create uniform compliance standards across all banks and NBFCs.

Scale-Based Approval Thresholds

Board approval is now mandatory for loans beyond specified limits:

Governance Safeguards

• Mandatory recusal of interested directors or executives from approval processes.
• Quarterly internal audits and statutory auditor reviews of all related party exposures.
• Public disclosures of top exposures and provisioning details in financial statements.

Exemptions and Allowances

• Loans to public trusts allowed if a trustee is also a bank director.
• Loans to directors backed by government securities, life insurance, or FDs are permitted (LTV ≤ 100%).
• Employee-directors can receive personal loans if they qualify under employee schemes.
• Non-fund-based facilities (e.g., guarantees) allowed if fully cash-collateralised.

Restrictions on Foreign Bank Branches

• Foreign bank branches in India are prohibited from lending to Indian firms where a director of the parent foreign bank abroad has an interest.